feratofema_vijay

8/4/2019 feratofema_vijay

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Foreign exchange regulation act to Foreign exchange management act

(1973) (August,1998)

R.Vijay Kumaran


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Balance of Payment

Balance of Payment refers to the yearlyfinancial statement of a country for thetransactions in the external sector with therest of the world. The BoP table has got twoside viz, credit (export) and debit (import),hence it can be conceptualized as balance

sheet of the country with rest of the world.


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Currency convertibility

It means freedom for withdrawal of foreign exchangefrom authorised dealer for payment abroad. Fullaccount convertibility refers to the permission to

withdraw foreign exchange without ceiling fortransaction.listed under the current account of theBoP.

India has adopted partial capital account convertibility

and liberal current account convertibility. RBI hasfixed ceiling on withdrawl of foreign exchange for fortransactions, under the capital account


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The Capital account is an accounting measure ot the totaldomestic currency value of financial tranaction betweendomestic residents and the rest of the world over a period of

time. Capital account can be divided into three account:

1. Direct Investment

2. Portfolio Investment

3. Other capital Flows


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The principle objective of the Foreign Exchange

Regulation Act (FERA) is to prevent the outflow

of Indian currency.The objective of the act is asfollows.

To regulate dealings in foreign exchange and

securitiesTo regulate the transaction indirectly affecting

foreign exchange

To regulate import and export of currency and

bullionTo regulate employment of foreign nationals

To regulate foreign companies

To regulate acquisition, holding etc of immovable

property in India by non-residents


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Given Indias progress towards a more open

economy, it was only inevitable that the

Foreign Exchange Regulation Act. (FERA).

Be reborn in a liberal, modern avatar. The

process received a push , with the cabinet

approving the draft Foreign Exchange

Management Act (FEMA). The draftreportedly relaxes to a degree the restrictions

on all current and some capital account

transactions.and provides for the expectedmove towards full account convertibility.

FERA was the product of a time when oil

crisis, among other things, had depleted

Indias foreign currency reserves.


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Unfortunately , the act went to absurd

lengths in its attempt to conserve foreign

exchange. A simple hospitality offered by a

foreign national for instance, had to be

reported to the government. The Act also

routinely came into the way of many national

business transactions, and combined with theextremely harsh penalties for offences under

the Act,

Effectively discouraged productive investment.The excess became glaring post1991, as the

countrys trade and investment linkage with the

rest of the world increased and foreign exchange

reserve mounted to near embarrassing levels.


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Business associations without exception and

rightly, saw the Act as a fetter on the ability

of domestic enterprise to take on thechallenges of a globalising world. It is this

concern primarily that the government is now

seeking to address with FEMA.

For all the expected relaxations through, the

draft bill is unlikely to receive more than half a

cheer from Industry. While most would welcomethe distinction the bill seeks to make between

compoundable and penal offencethe former

with provisions for fine and the latter with

provision for criminal proceedings


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It is still far from clear what would actually

constitute penal offence(s) and what would be the

enforcement directorates precise powers. If penaloffences relate essentially to money laundering

activities--- the Indian subcontinent is ,

incidentally,a major international hub for such

actions--- the definition would make eminentsense. A much wider definition could, however

make the proposed act not very different from

what exists, and especially if the current over

arching power of the enforcement directorateremain what the are. It was also widely

anticipated that the provision of new bill would

apply retrospectively,to cover cases already under

investigation.


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As it stands tough, this is not to be . The

principle that on going cases ought to be

considered in the light of the objectives and

norms that obtain today is a well established

one, and it is difficult to understand why

government did not it appropriate forapplication in the present instance. The issue

needs to be debated once again. Finally the

government would do well to examine howother countries, placed in situation similar to

Indias in the matter of foreign exchange

problems, have managed with significantly

more lenient le islation.


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If Indian enterprise is to mark its presence

globally, it is perhaps much better to err on

the side of liberty.In any case, the

government guiding objective in this whole

exercise should be to take the fear out of

FERA.


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The FEMA act extends to the whole of India.

The main provision of the Act are as follows:

Section 3: Dealing in Foreign Exchange

Section 4 Holding of foreign Exchange

Section 5 Current account Transaction

Section 6 : Capital account Transaction

Section 7: Export of Goods and Services

Section 8 : Relisation of Repatriation and Foreign Exchange

Section 9: Exemption from Resalisation and Repatriation


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Recent Changes

Overseas Investment

External commercial Borrowing( ECB)

Liberalized Remittance of US $ 25000 perannum by Resident Indians.

Foreign Investment liberalized.

Student studying abroad are treated as NRIs

The system of self write-off and selfextension of due date for export realisationfor exporter was introduced.


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The Rupee Progress

1950-51 to 1960-61 : Rs 4.761980-81 : Rs 7.91987-88 : Rs12.97

1992-93 : Rs 30.652001-02 : Rs 47.68The rupee has not been too volatile over the years.

But that doest mean it hast depreciated to thedollar. It has fallen from Rs 4.76 in 1950-51to Rs

47.84 on December 7,2001-a plunge in excess of1000%. Now, see this in the light of the fact that thepast 50 years have seen a mere two devaluation(in June 1966 and July 1991) and


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The Rupees Progress

It is evident that the rupee has continuallyadjust its value. In 1991, the RBI partiallyfreed the rupee through the liberalised

Exchange Rate Mechanism (LERM) in 1991.Subsequently in 1993, the central bankscrapped LERMs and made the rupee free

on the trade account. And in 1993, the RBImade the rupee fully convertible on thecurrent account to boost foreign capitalinflows.

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